How many reference patterns can improve profitability for real-time trading in futures market?

Authors:
Suk Jun Lee;Kyong Joo Oh;Tae Yoon Kim
Affiliations:
Department of Information and Industrial Engineering, Yonsei University, 262, Seongsanno, Seodaemun-ku, Seoul 120-749, South Korea;Department of Information and Industrial Engineering, Yonsei University, 262, Seongsanno, Seodaemun-ku, Seoul 120-749, South Korea;Department of Statistics, Keimyung University, 1000, Sindang-dong, Dalseo-ku, Daegu 704-701, South Korea
Venue:
Expert Systems with Applications: An International Journal
Year:
2012

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Abstract

Investors in futures market used to employ trading system which depends on reference pattern (template) to detect real-time buy or sell signal from the market. Indeed they prepare in advance a number of reference patterns that market movement might follow, and then match the current market with one of reference patterns. One popular way to prepare templates is to fix a relatively small number of them which represent possible market movements efficiently. The underlying assumption of this approach is of course that the current market movement is close enough to one of the templates. However, there is always a calculated risk that the current market is close to none of them sufficiently. In this article we investigate the issue of appropriate number of templates (or template cardinality I) in terms of profitability. We will show that one may improve profitability by increasing I and that random pattern sampling plays a key role in such case. An empirical study is done on the Korean futures market.